Policy, purpose, and regulatory intent
- The rules are adopted to further strengthen the IC regulatory framework.
- The rules are adopted to ensure integrity of audited financial statements.
- High ethical and qualification standards for external auditors are intended to encourage quality control and a disciplined financial environment.
- Strict reporting obligations are intended to support timely and appropriate remedial action by the IC.
Coverage and who must use accredited auditors
- Section 2 limits coverage to companies under the IC that are grouped as follows:
- Group A: Insurance companies, Reinsurance companies, and Mutual Benefit Associations.
- Group B: Insurance and reinsurance brokers, General agents, and Trusts for charitable uses.
- Section 4.1 provides that only external auditors and auditing firms duly accredited by IC may be engaged by covered institutions under Section 2.
- Section 4.1 provides an automatic qualification rule:
- Auditing firms accredited by IC to audit Group A entities may audit Group B entities.
- Individual external auditors accredited by IC may audit only Group B covered entities.
- Section 4.4 requires that both partners and the auditing firm (if applicable) must be accredited by IC.
- Section 4.7 requires that accreditation remains effective for a limited period and becomes automatically subject to delisting and renewal conditions.
Core definitions established
- Section 3.1 defines External Auditor as a single practitioner or a signing partner in an auditing firm.
- Section 3.2 defines Auditing Firm to include a proprietorship, partnership, corporation, or other legal entity, and any associated person that is engaged in the practice of public accounting or in preparing/issuing audit reports.
- Section 3.3 defines Fraud as an intentional act that may reduce the company’s consolidated total assets by five percent (5%), including:
- manipulation, falsification or alteration of records or documents;
- misappropriation of assets;
- suppression or omission of effects of transactions;
- recording of transactions without substance;
- intentional misapplication of accounting policies; or
- omission of material information.
- Section 3.4 defines Error as an unintentional mistake that may reduce consolidated total assets by five percent (5%), including:
- mathematical or clerical mistakes;
- oversight or misinterpretation of facts; or
- unintentional misapplication of accounting policies.
- Section 3.5 defines Gross negligence as wanton or reckless disregard of the duty of due care in complying with Generally Accepted Auditing Standards.
- Section 3.7 defines Audit Engagement Letter as the document confirming the auditor’s acceptance of appointment, the objective and scope of the audit, the extent of responsibilities, and the form of reports.
- Section 3.8 defines Signing Partner as the auditor-in-charge/concurring partner/partner-in-charge/managing partner responsible for signing the audit report on the consolidated financial statements and, where relevant, on the financial statements of entities forming part of the consolidation.
- Section 3.9 defines Entities as all companies under IC jurisdiction.
Accreditation scope, duration, rotation, and effects
- Section 4.1 requires that covered institutions engage only IC-accredited external auditors and/or auditing firms, subject to mutual recognition rules under the MOA and implemented by the Circular.
- Section 4.1 requires reliance on the accreditation categories as follows:
- IC-accredited auditing firms for Group A are automatically qualified for Group B.
- IC-accredited individual external auditors can audit only Group B.
- Section 4.2 requires rotation/changes:
- the external auditor and/or auditing firm must be changed, or the signing partner must be rotated every five years or less.
- Section 4.3 provides a transition:
- covered entities with external auditors/auditing firms engaged for a consecutive period of five (5) years or more as of the Circular’s effectivity must, within one (1) year from effectivity, either change the external auditor/auditing firm or rotate the signing partner.
- Section 4.6 provides that the IC is not liable for any damage or loss arising from the selection of an accredited external auditor/auditing firm by a corporation for regular audit.
- Section 4.7 provides accreditation duration and renewal:
- accreditation expires or the auditor/firms is automatically delisted after three (3) years from the date of IC approval,
- unless renewal is filed not later than sixty (60) days before expiration,
- and accreditation is subject to continuous monitoring and periodic evaluation for possible delisting prior to expiration.
- Section 4.8 provides mutual recognition for Group C or D companies under SEC/BSP categories:
- SEC, BSP, and IC mutually recognize accreditation granted for Group C or D (SEC’s Category B and C, BSP’s corresponding Group B and IC’s Group B) consistent with the MOA’s paragraph (5).
- Section 4.5 clarifies responsibility limits:
- accreditation does not exonerate the reporting company or auditors from responsibilities,
- management remains primarily responsible for fairness of representations in financial statements filed with IC,
- the independent certified public accountant’s responsibility is confined to expressing an opinion (or lack thereof) on examined statements.
Qualification standards for auditors and firms
- Section 5.1.A requires that an individual applicant must be primarily accredited by BOA.
- Section 5.1.A.b requires, at the time of application, at least five (5) years of external audit experience acquired as an in-charge, manager, or partner (or equivalent).
- Section 5.1.A.c requires adequate established quality assurance procedures reflected in the auditor’s Manual and the financial statements of audit clients.
- Section 5.1.A.d requires notarized certifications in addition to BOA independence screening, covering:
- no direct/indirect financial interest acquired in specified entities by the auditor or immediate family (Section 5.1.A.d.1);
- no loan to/from specified entities or any officer/director/principal stockholder (Section 5.1.A.d.2);
- the auditor is not an IC-regulated entity employee/officer/director/consultant and is not appointed conservator/receiver/liquidator by IC (Section 5.1.A.d.3);
- preservation of working papers/related documents for five (5) years and availability to IC representatives when required or directed (Section 5.1.A.d.4).
- Section 5.1.B provides experience and competency requirements:
- at least two (2) years of the required five (5) years must be spent auditing the type of entity covered by the Circular;
- auditors with five (5) years in regular audit may be considered if they lack insurance field experience but have attendance/participation of at least 40 hours in insurance/reinsurance accounting/auditing seminars conducted by IIAP or other IC-recognized organization;
- the applicant must have sufficient knowledge of regulatory requirements, operations, and functions of specific companies covered by the application.
- Section 5.2 imposes firm requirements:
- the auditing firm must be primarily accredited by BOA, and the firm’s applicant partners’ names must appear in the BOA accreditation certificate attachment;
- BOA furnishes to regulators addendum listing additional partners as part of BOA accreditation;
- at application time, the firm must have at least 1 signing partner already accredited, or already qualified and applying for IC accreditation;
- the firm must have established quality assurance procedures reflected in its Manual and in the financial statements of partners’ audit clients.
Application and renewal filings; fees
- Section 6.1 requires initial accreditation filings by individual external auditors/partners through a duly accomplished and notarized application form (IC Form A) submitted with:
- certified true copy of a valid and updated BOA Certificate of Accreditation;
- proof of audit experience such as a list of corporate clients showing engagement period;
- copy of the Quality Assurance Manual with adequate audit procedures ensuring full compliance with accounting and regulatory requirements, and written general description of:
- the quality assurance process (including client acceptance/retention policies, concurring partner review, consultation process, etc.);
- procedures for monitoring professional ethics and independence from clients;
- other quality assurance policies/procedures under Philippine Standards on Auditing No. 220, Philippine Standards on Quality control, and their amendments, or as required by IC;
- notarized undertaking of compliance with qualification requirements under Section 5.1.A.d;
- certificate of attendance/participation in seminars of at least 40 hours conducted by IIAP or IC-recognized organization/association;
- copy of latest audited financial statements of the applicant’s 2 largest clients by total assets.
- Section 6.2 permits renewal within 60 days before the three (3)-year expiration, subject to early deletion provisions, by filing a duly accomplished renewal application form (IC Form A-R) with:
- certified true copy of a valid and updated BOA Certificate of Accreditation;
- notarized certification that the auditor still possesses all qualifications under Section 6.1.d;
- certificate of attendance/participation in seminars of at least 36 hours for the last three (3) years conducted by IIAP or other IC-recognized organization/association;
- list of clients audited during the three-year period, indicating IC and other regulators’ findings on those AFS and the actions taken;
- copy of the IC Certificate of Accreditation that will expire;
- amended/updated documents if changes occurred from the initial accreditation submission.
- Section 6.3 imposes an initial or renewal application fee for individuals/partners of Two Thousand Pesos (P2,000.00).
- Section 7.1 requires initial accreditation filings by auditing firms through a duly accomplished and notarized application form (IC Form B) signed by the managing partner, submitted with:
- certified true copy of a valid and updated BOA Certificate of Accreditation with attached list of qualified partner/s of the firm;
- copy of the Quality Assurance Manual;
- copy of the applicant’s latest audited financial statements of its 2 largest clients by total assets;
- copy of the firm’s audited financial statements for the immediately preceding 2 years.
- Section 7.2 allows renewal within 60 days before the three-year expiration through written application form (IC Form B-R) with:
- certified true copy of a valid and updated BOA Certificate of Accreditation with attached list of qualified partner/s;
- amendments on the Quality Assurance Manual, including written explanation of such revisions, if any.
- Section 7.3 imposes an initial or renewal application fee for auditing firms of Five Thousand Pesos (P5,000.00).
- Section 8 provides mutual recognition for Group B applicants already accredited by SEC or BSP by presenting:
- certified true copy of accreditation covering the entities issued by SEC or BSP;
- proof of at least two (2) years experience auditing covered Group B entities; or
- certificate of attendance/participation in seminars of at least 40 hours for 3 consecutive years in seminars conducted by IIAP or any other IC-recognized organization/association.
Operational duties and quality control reporting
- Section 9.1 prohibits accredited external auditors and auditing firms from accepting specified non-audit services for statutory audit clients that could affect independence, including:
- bookkeeping or other services related to accounting records or financial statements;
- information systems design and implementation and assessment;
- appraisal or valuation services;
- actuarial services;
- internal audit functions and/or outsourcing services;
- management functions or human resources;
- insurance underwriting, investment dealer/adviser/manager;
- legal services and expert services unrelated to the audit;
- any other services the IC declares not permissible.
- Section 9.2 requires compliance with:
- engagement letter terms and undertakings;
- Philippine Standards on Auditing and related issuances of the Auditing Standards and Practices Council;
- Code of Professional Ethics;
- other pertinent laws, rules, and regulations.
- Section 9.3 requires written quality control policies and procedures submitted with the accreditation application.
- Section 9.3 requires reporting changes:
- any change or amendment to quality control policies must be reported to IC not less than ten (10) days prior to effectivity,
- and if IC does not comment or object within ninety (90) days from submission, the changes are deemed duly noted and become part of the accredited firm’s records on file.
Reportorial requirements to the IC
- Section 10.1 requires reporting to IC within 30 calendar days after discovery by the external auditor and/or auditing firm for:
- any material findings involving fraud or error as defined in Section 3.3 and Section 3.4;
- under-reserving of Incurred But Not Reported (IBNR) losses/policy reserves where the aggregate leads to capital deficiency/impairment;
- findings that consolidated assets on a going concern basis are no longer adequate to cover total liabilities;
- material internal control weaknesses that may lead to financial reporting problems;
- termination or resignation as external auditor stating the reason;
- discovery of a material breach of laws or IC rules and regulations;
- findings on matters of corporate governance requiring urgent action by IC.
- Section 10.2 requires a negative report when nothing is to be reported:
- if there are no matters to report, the external auditor/auditing firm must submit directly to IC within 15 calendar days after the closing of the audit engagement a notarized certification that none exists.
- Section 10.2 requires communication to management:
- management of the covered institution, including subsidiaries and affiliates, must be informed of adverse findings,
- the external auditor/auditing firm’s report to IC must include pertinent explanation and/or corrective action.
- Section 10.2 grants management participation in discussions:
- management must be given opportunity to be present in discussions between IC and the external auditor/auditing firm regarding audit findings,
- except when the external auditor believes management is involved in fraudulent conduct.
- Section 10.2 links auditor accountability to audit coverage and stated non-audit services, limiting accountability to matters within normal audit coverage and identified non-audit services provided herewith.
- Section 10.3 requires contracts between the company and the external auditor to include a provision that the auditor’s disclosure to the Commission is not a ground for civil, criminal, or disciplinary proceedings against the auditor.
Delisting and suspension consequences; due process
- Section 11 provides that an external auditor/auditing firm shall be delisted from the roll of accredited auditors after due notice and hearing upon any of the following:
- failure to submit the report required under Section 10;
- continuous conduct of audit despite loss of independence under Section 9.1;
- willful misrepresentation in:
- application and renewal for accreditation,
- report required under Section 10, or
- notarized certification of compliance with provisions of the Circular;
- a determination by BOA, after due notice and hearing, that the external auditor committed an act inimical to the profession under the Code of Professional Ethics for Certified Public Accountants, with BOA informing IC;
- declaration of conviction by a competent court of a crime involving moral turpitude, fraud (as defined in the Revised Penal Code), or declaration of liability for violation of the Insurance Code, Corporation Code, and rules and regulations of concerned regulatory authorities;
- refusal, without valid reason, upon lawful order of the Commission, to submit requested documents in connection with an ongoing investigation;
- gross negligence in audits resulting in, among others, non-compliance with generally accepted auditing standards in the Philippines or issuance of an unqualified opinion not supported by full GAAP compliance by the auditee, where such negligence is determined by IC after proper investigation with due notice and hearing to the external auditor;
- failure to comply with Philippine Auditing Standards and Philippine Auditing Practices Statements;
- dissolution of the auditing firm/partnership evidenced by an Affidavit of Dissolution submitted to BOA, or upon IC/Commission findings that the firm/partnership is dissolved; accreditation may be reinstated when the dissolution is shown to be solely for admitting new partner/s and the firm is re-recognized and re-registered;
- involvement of the firm or any signing partner in a major accounting/auditing scam or scandal, with delisting depending on gravity and impact on the investing public of the insurance market as determined by the Commission.
- Section 11 directs coordination with other regulators:
- IC informs BOA, SEC, and BSP of violations that may affect accreditation status as a public practitioner.
- IC sanctions do not prejudice penalties that BOA, SEC, or BSP may impose under their respective rules.
- Revocation of accreditation by BOA results in automatic IC revocation/derecognition.
Effect of repeal, consistency rule
- Final clause provides that all previous provisions, rulings, and policies inconsistent with the Circular are superseded.
- The Circular is adopted on 10 Nov. 2009.